Industry Ponders Impact of Mortgage Collapse

Waiting For the Sub-Prime Fallout

Deals On the Sidelines For Now in Once Red Hot Market as Industry Ponders Impact of Mortgage Collapse

Nobody’s sure yet how profoundly the woes of New Century Financial Corp. and other sub-prime lenders will affect the lives of their employees and mortgage holders. But with sub-primes on the hook for more than 5 million square feet of office space in Orange County -- and up to 3 million square feet of new office development about to hit the market -- landlords and their brokers are also getting sweaty palms.

Direct vacancy rates that have held steady at 7% over the last year could go up into double digits if mortgage companies go belly up just as the new deliveries hit the market. Opinions vary, though, how deep or lingering the effects would be.

"Tenant demand is down, and a big part of the reason is that people are waiting on the sidelines to see what happens with the sub-primes," said Greg May, senior vice president, Grubb & Ellis. "You’ve got landlord expectations on one hand and tenant expectations on the other, it’s kind of deer-in-the-headlights for now."

The New York Stock Exchange on Tuesday gave the boot to Irvine-based New Century, cut off by its lenders because of its high-risk loan portfolio and under investigation by federal regulators and prosecutors. The Dow Industrials fell 242.66, or nearly 2%, Tuesday on reports of the financial problems at New Century, Accredited Home Lenders Holding Co., and General Motors Acceptance Corp.'s residential unit. The index rebounded to close 56 points higher after a volatile session Wednesday.

The looming threat of a bankruptcy filing by New Century prompted its landlord, Maguire Properties Inc. (NYSE: MPG), to release a statement saying the loss of the tenant would create "minimal exposure" for the Los Angeles-based REIT.

New Century has two leases totaling 267,000 square feet at Maguire’s Park Place campus in Irvine and a pending lease for 190,000 square feet at its new $240 million tower under development at 3161 Michelson.

Maguire believes that should New Century leave, it could re-lease the existing space at Park Place for 50% more than the $24.27 per square foot the lender is paying. Maguire, which would became Orange County's second-biggest landlord following the purchase of a portfolio of properties from The Blackstone Group, has been able to sign Park Place tenants to starting rents recently at $35 to $37 per square foot. The new 3161 Michelson tower could yield 25% more in rent if New Century can’t take occupancy, Maguire said.

The 2.5 million to 3 million square feet in new buildings by Maguire and other developers is more worrisome than the sub-prime shakeout, May said. "By my count, 105 full floors of Class A office are being delivered in the next six months," he said. "Only 10 floors have been pre-leased, and of those, six were New Century pre-leases at Park Place."

New Century also leases space at Irvine Center Towers in Irvine from The Irvine Co., the county's largest landlord, which also leases to sub-prime lenders such as the Orange-based parent of Ameriquest Mortgage and Option One, a unit of H&R Block based in Irvine.

May believes that worst case, the market would see vacancy rates of 12-13%, chiefly because of the new inventory. But he said that’s manageable if the economy keeps creating jobs.

Another executive who represents office owners in the Irvine market was glummer about the market’s ability to absorb the expected hit. Between existing vacant sublease space, new development and leases abandoned by the sub-primes, "that’s a lot of space coming back at us to absorb." The executive didn't want to be identified.

May noted that Ameriquest Mortgage Co. has been able to sublease about two-thirds of the 600,000 it put back on the market last year. But potential subtenants may shun New Century if they think it’s going out of business, he said.

"If you’re a subtenant and your sublessor goes out of business, you’re generally at the mercy of the landlord," May said. Written by Randyl Drummer

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